Swinders in the Mist

Do you remember the days in the old school yard? Remember how some kids couldn’t take any loss of face? Investors who lost their fortunes in the Madoff Scandal (the guy who made off with over $50 billion from his Ponzi scheme) are now hoping to claim the appreciated amount of money instead of the initially invested amount:

The customers say that, by law, they should be given credit for the full value of the securities shown on the last account statements they received before Mr. Madoff’s arrest in mid-December, even though they were bogus and none of the trades were ever made. According to court filings, those account balances add up to more than $64 billion.

…

“We are talking about some of the saddest cases imaginable,” he said. “These are people in their 70s and 80s who cannot work and have no possible source of income to replace the money” lost in the fraud.

Let’s not forget that 70 and 80 year olds are adults too, and are as responsible as anyone else for their mistakes or for losses made with what had to be surplus funds to invest with Madoff. We’re not talking about orphans or destitute old bums living out of cardboard boxes in alleyways. They never had any money to invest in the first place.

It’s like a private school sports team that can’t accept defeat. Investors are stamping their feet, complaining that the rules weren’t fair and that they ought to get their money back. Had it been the opposite scenario, had these investors made a wrongful profit, you could be assured that they would not let go of a cent.

Frankly, these investors with Madoff don’t deserve any media attention or extra compensation. Yes, they were victims of fraud and yes, they are rightly sore about it all, but Madoff was not guaranteeing the investment money (he was not posing as a Government backed financial institution, such as a bank). There was no legislation protecting investors from making a loss. They took a risk and they lost. It’s the same for anyone who gambles and loses – why should they have it any different?

The argument that receipts of the inflated sum at investment should be used to gain a tax advantage is problematic, because it encourages Ponzi style schemes (if you win, hooray, if you lose, it’s a tax break). This was not a real investment, and it should not be treated as though it ever was one. When people gave their money to Madoff, who promised to bank it for them, they accepted that they may never see the money again. This is the reason why you should diversify your investments and not trust any one vehicle, or if you absolutely positively don’t want to lose the money, buy gold and put it in a vault or something.

What this illustrates is the mentality of US investors. They are like two-year-olds who can’t come to terms with the negative meaning of the world “risk”. But of course, in this financial crisis, there must be no losers. Everybody has to be bailed.

The relevant part (as I see it) from the pdf file you provided is this:

To put it simply, the Madoff clients are entitled to what they
had been told they had as of their last statement before the
bankruptcy petition was filed – under the law. Under Rule 502,
adopted by SIPC, and under the New Times case, it doesn’t matter
if the securities weren’t bought. If they were real securities
that could have been bought, the Madoff account owners are
entitled to them or their cash equivalent, as long as they were
sent a written confirmation of each transaction by the broker,
i.e. Madoff, which they were.

Therefore, they are entitled to all of their illusory profits –
under the law, according to 17 C.F.R. Section 300.502. And under
the New Times case, In re: New Times, 378 F.3d. 68 (2nd Cir.
Court of Appeals, 2004) . And even according to what the
President of SIPC, Herbeck himself, said from the original
bankruptcy proceeding, In the Matter of New Times Securities,
Inc., Case No. 800-8178.

Thank you for the reference. They sound like they might have a case in law, even though I personally disagree with it.